Philippine Top Court Asked to Stop Bond-Exchange ‘Monopoly’

By Norman P. Aquino and Cecilia Yap -
Sep 5, 2013

A group of former Philippine policy
makers has asked the Supreme Court to stop what they see as the
monopoly of the nation’s sole bond exchange, a charge that
threatens the planned merger of the stock and debt bourses.

In a 117-page petition, two ex-lawmakers, a former budget
secretary and two ex-national treasurers asked the court to void
regulatory orders that gave the Philippine Dealing & Exchange
Corp., or PDEx, the power to operate the nation’s only debt
bourse. The Securities and Exchange Commission, Bangko Sentral
ng Pilipinas, Finance Secretary Cesar Purisima and National
Treasurer Rosalia de Leon were also named as respondents in the
petition.

“The hallmark of a free market is freedom of choice,” the
petitioners said in the legal filing, alleging PDEx’s status as
a self-regulated organization has led to high transaction costs.
“PDEx’s requirements unduly impede this freedom and impose
barriers to the establishment of a free market.”

The suit, filed on Aug. 22, threatens a planned merger of
the country’s stock and bond exchanges that seeks to deepen
financial markets. Any court decision that leads to a disruption
in Philippine financial markets may fuel fund outflows,
according to PCCI Securities Brokers Corp., at a time when the
prospect of the U.S. cutting stimulus has already hurt demand
for emerging-market assets.

‘Complicated Transaction’

“PDS Group is only interested in pursuing legitimate
activities pursuant to the policies of the government,” PDEx’s
parent Philippine Dealing System Holdings Corp., which is also a
respondent in the case, said in an e-mailed statement today.
“Its business rests on well-founded legal and statutory bases
and it submits itself to the sound discretion of the Supreme
Court.”

Local markets will “conduct business as usual” while the
court’s decision is pending, the company said.

The Philippine Stock Exchange is seeking legal advice on
its planned merger with the bond bourse, Chairman Jose Pardo
said in a phone interview today.

“We’re at the crossroads of trying to unravel what appears
to be a complicated transaction now that a lawsuit has been
thrown, at least, in PDEx’s way,” he said.

Bankers Association of the Philippines, which was also
named a respondent, will meet “to discuss the case and action
plan,” President Lorenzo Tan said in a mobile-phone message
today. The lenders’ group, the Philippine Stock Exchange and the
Singapore Exchange Ltd. (SGX) hold 65 percent the the Philippine
Dealing System, which owns the bond exchange.

Capital Flight

The average daily bond trading volume in the Philippines
has more than doubled to 28.5 billion pesos ($642 million) this
year from 10.6 billion pesos in 2009, data compiled by Bloomberg
show. Trading peaked at 122 billion pesos on Oct. 15, 2010,
according to data going back to August 2008.

“A temporary restraining order that leads to a trading
halt could trigger a capital flight because a number of overseas
investors hold Philippine debt,” James Lago, an analyst at PCCI
Securities Brokers, said by phone. “The most rational move for
the court is to compel both parties to present their arguments
and settle this issue soonest.”

The high tribunal gave the respondents 10 days to comment
on the filing from the time they receive the order, court
spokesman Theodore Te said.

‘Avoid Disruptions’

“We are working with regulators who are likewise
respondents to the petition to avoid market disruptions and
implement mechanisms that will preserve transparency, price
discovery and market stability,” Purisima said in a mobile-phone message yesterday.

They also cited conflict of interest when PDEx,
incorporated in 2003 as a fixed-income exchange, was allowed to
act as a self-regulated organization that also operates the
over-the-counter market for government securities.

The twin roles “create distortion in the free market,
allowing the shifting or alternate trading in an exchange and in
the OTC market under the auspices of a single entity,”
according to the suit.

The PDEx’s “imposition of unreasonable fees” is
“reprehensible for being confiscatory and coercive,” according
to the filing. “None of these exorbitant fees go to the
government but instead remain with PDEx.”

Bloomberg LP, the parent of Bloomberg News, provided a
platform for interbank trading of peso-denominated Philippine
government bonds before PDEx took over.